Oil Price War 'Has Just Started,' IEA Declares

For those hoping that the recent run-up in oil prices means the end of Western Canada’s economic pain, the International Energy Agency has bad news: The oil price war isn’t over. Not by a long shot.

Many in the industry had been hoping that a steep drop in U.S. oil production — the U.S. oil rig count has fallen by 60 per cent since oil prices started sliding — would mean the beginning of a recovery in oil prices.

But the IEA’s latest monthly oil outlook shows global oil production hasn’t slowed, because, as the U.S. cuts production, Saudi Arabia and other producers are making up all the difference with higher production levels.

The global oil glut continues to grow, the IEA said, with OPEC’s crude supply growing to 31.2 million barrels per day, the highest level since September 2012. Global oil supply is outstripping demand by about 2 million barrels per day.

It’s becoming increasingly obvious that OPEC oil producers, led by an aggressive Saudi Arabia, are in a pitched battle with non-OPEC countries for market share.

Canadian producers are in a unique position. They’ve seen stronger price gains than other oil exporters because of better access to the U.S. market — new pipelines have been coming online, and oil-by-rail has exploded in recent years. The slowdown in U.S. production is likely helping to boost demand for Canadian product as well.

That, in turn, will mean less new oil supply coming online in the future, which in turn will mean higher oil prices down the line. But in the near term it means “a curtailment of one million barrels per day of future production and at least US$40 billion in investment,” he writes.

He notes that the stakes are pretty high in the market-share war: “One percentage point of market share translates into almost US$60 million per day at today’s prices.”

And even the struggling U.S. shale-oil industry isn’t out for the count. The recent rebound in prices could put some of those producers back in action.

"Several large [U.S. shale oil] producers have been boasting of achieving large reductions in production costs in recent weeks. At the same time, producer hedging has reportedly gone steeply up, as companies took advantage of the rally to lock in profits," the IEA said, as quoted at Reuters.

"It would thus be premature to suggest that OPEC has won the battle for market share. The battle, rather, has just started."